Government backtracks on pension inflation changes

Firms have been left confused after the Government backtracked on moves aimed at slashing the cost of providing pensions.

It has emerged that private sector pension schemes will not be forced to use the consumer prices index (CPI) measure of inflation rather than the retail prices index (RPI) to uprate pensions, a move suggested by the Government in the summer.

Telecoms giant BT had already made changes to its pension scheme following the summer announcement and has wiped £2.9 billion off its pension liabilities, reducing its pension deficit to £5.2 billion. The switch has already been introduced into the state and public sector schemes, taking effect from April 2011.

But pensions minister Steve Webb revealed yesterday that the Government would not insist that firms change the rules. He said: “We do not plan to grant schemes a modification power to make it easier to use CPI, where they do not already have the power to amend the scheme rules.

“We believe that members’ trust in schemes and the scheme rules could be severely damaged if we intervene to give schemes the power to change their rules where the scheme does not already have such a power. Trust in pensions is important, and I believe intervention demands strong justification.”

According to a National Association of Pension Funds survey, six in 10 (61%) pension schemes cannot currently make a switch, mainly because they have RPI indexation hard-wired into their rules.

Joanne Segars, the National Association of Pension Funds’ chief executive, said: “Having marched us up to the top of the hill and created confusion in the pensions industry, the Government has now marched us back down again. The Government really underestimated the complexity of this issue.

“While keeping many pensions locked into RPI is good news for current and future pensioners, the effect on the sustainability of final salary pensions is less positive. Pension funds are under great stress, and some really need the breathing space that an option to switch to CPI would have given.”

Charles Cotton, performance and reward adviser at the Chartered Institute of Personnel and Development, warned that some employers might now review their pension provision in light of this.

Laith Khalaf, a pensions analyst at Hargreaves Lansdown Pensions, told Personnel Today that changes could be made to schemes with future benefits. “We will probably see companies consulting with employees and saying we are going to move to CPI and the benefits built up from now will be linked to CPI rather than RPI. A lot of them will do it for future benefits,” he added.